Interim
Joint Committee on Appropriations and Revenue

Minutes
of the 3rd Meeting

of the 2003 Session Break

January
28, 2003

The 3rd meeting of the Interim
Joint Committee on Appropriations and Revenue was held on Tuesday,
January 28, 2003, at 10:00 a.m., in Room 131 of the Capitol Annex. Representative
Harry Moberly, Jr., Chair, called the meeting to order, and the secretary
called the roll.

Secretary Morgan said Medicaid will cover one in five
Kentuckians this year for a total of 869,000 citizens. Almost 50 percent of all
births in FY 2002 were paid for out of Medicaid funds and Medicaid currently
has 32,000 providers. Medicaid spending has increased 64 percent in the last
seven years. Over 20 percent of Kentucky's state budget goes to Medicaid and 11
percent of all General Fund dollars are in the Medicaid program. The Department
for Medicaid Services and the Medicaid Steering Committee have been working for
two years in an attempt to contain Medicaid expenditures without cuts to
service, the number of eligibles, or rates. Secretary Morgan said there has
been a Medicaid expenditure problem since FY 2001. The department has achieved
$201 million in savings and $185 million in new federal revenue through
intergovernmental transfers. There have been 33 cost containment initiatives
completed that focused on program integrity, utilization management, and rate
restructuring.

Since 2001, the economic downturn has increased the number
of eligibles and there has been a return of double-digit inflation in the
health care delivery system because of labor market costs, technology, and
pharmacy costs. Because of the decline in state revenues, the Medicaid budget
was flat funded in FY 2003 and FY 2004. The number of Medicaid eligibles has
grown rapidly since a projection made in January 2002. In December, there were
604,000 citizens on the Medicaid roll.

Secretary Morgan said a serious impact on the Medicaid
budget is pharmaceuticals. Pharmacy programs across the nation are experiencing
tremendous growth and pharmacy is Kentucky's largest Medicaid program at $750
million. Kentucky leads the nation in the number of prescriptions per person.

Secretary Morgan said Governor Patton announced $250 million
in reductions on January 16, 2003, bringing the total cost of reductions to
$551 million, which is 13.7 percent of the budget. These cost containment
efforts are 13 initiatives divided into two phases. Phase I initiatives are
ready for implementation and will save an estimated $165 million in costs.
Phase II initiatives will avoid an estimated $85 million in costs.

Senator Stivers asked if there is any way to track drug
abuse and fraud for prescription drugs. Secretary Morgan said the KASPER
program has a database that can track doctor shopping and patients looking for
additional prescriptions. The data, however, is about one month behind. The
program was slated for a major upgrade but the upgrade cannot be done under the
current spending plan.

Senator Stivers asked how much it would cost to upgrade the
KASPER system, and if an upgrade would reduce prescription drug abuse, or
Medicaid abuse. Secretary Morgan said she would provide the information on the
cost of upgrading the system. She said the cabinet has followed several
scheduled drugs and the findings show that most drug abuse is through cash and
carry rather than through the Medicaid program. Because of Kentucky's
increasing drug abuse problem, the cabinet has assigned regional nurses out in
the state to look at Medicaid's top 50 prescribers and their patient loads.

Chairman Moberly said 27 states have eliminated the
"medically needy" category under Medicaid. He asked what population
is covered under "medically needy." Ms. Kustra said "medically
needy" is a category that covers patients who are eligible because their
medical costs exceed their resources. Many Kentuckians are eligible under this
category because of Kentucky's general health status and the fact that it leads
the nation in smoking, cardiac, and cancer rates.

Representative Brinkman asked why pharmacy costs are rising
so dramatically. Ms. Kustra said one reason for rising pharmacy costs is
pathology. Kentucky leads the nation in smoking, cardiac, and cancer rates.
Another reason is prescription advertising on TV. A recent study indicates that
60 to 65 percent of all patients are requesting and receiving specific prescriptions
by name because of direct TV advertising. Representative Brinkman said pharmacy
costs are real cost-drivers and drug companies have become very adept at
advertising. He said it is ironic that the TV commercials show remarkably
healthy people using these drugs. He said strategies need to be developed to
rein in some of the costs and inappropriate use of pharmaceuticals.

Representative Napier asked if it is known how many
prescription drugs are written for children who misbehave in school. He said he
is aware of some children who act out in the classroom so the family will
receive a disability check for their misbehavior. Secretary Morgan said there
are families who qualify for disability when their children misbehave in school
and disability numbers have increased dramatically in Kentucky. She said
Disability Determinations may be able to provide the exact number. Ms. Kustra
said the cabinet monitors ADHD drugs and has not seen an increase in the number
of prescription drugs.

Representative Ford asked about pharmaceutical reimbursement
rates. Ms. Kustra said the fee for service is $3.51 plus $1.00 co-pay per
prescription, and the fee is $4.51 if the individual is not eligible for
co-pay.

Representative Ford asked about the KCHIP program. Secretary
Morgan said the initial concept of the KCHIP program was like a private
insurance program, but it was difficult to get started at the time because of
federal rules. As a result, Kentucky implemented the program in multiple phases
and made it part of the Medicaid program. Phase II was 100 to 150 percent of
the federal poverty level, and Phase III is 151 to 200 percent of the federal
poverty level. The cabinet excluded nonemergency transportation and early
periodic screening diagnosis and treatment. Ms. Kustra said Kentucky is one of
only two states that does not have cost-sharing in its KCHIP program.
Representative Ford asked how much money was spent promoting the program.
Secretary Morgan said the cabinet spent somewhere between $6 million to $9
million to promote the program through media, outreach workers, and training.
Ms. Kustra said Kentucky received a 90:10 federal match per system change to
expand coverage for children. Representative Ford said the program has been
expanded beyond federal guidelines. He asked how much the expansion is costing
the state. Secretary Morgan said the KCHIP program has not cost the state any
additional dollars because the appropriation is the same. However, there are
more costs associated with the Medicaid program because of outreach.
Representative Ford asked what the minimum eligibility requirement is for
Medicaid. Secretary Morgan said it is 100 percent of the federal poverty level.
Representative Ford asked for be provided with information on each category
under the federal guidelines, what the national average is, what Kentucky's
average is, and what the cost is to Kentucky.

Representative Ford asked about adult day care for those
under 21 years of age. Secretary Morgan said patients under 21 are no longer
eligible for adult day care but there are other services available to those
particular patients.

Representative Lee said the state is mandated to take care
of Medicaid eligible individuals under any mandatory program. He said it is
important not to lose the infrastructure by reducing the waivers for the
providers. Providers have remained loyal to the system and loyal to the
Medicaid program without receiving any increase in overhead, or cost of living
since 2001. The state is facing some very difficult choices in a short period
of time and further reductions are going to cause even more pain because the
eligible individuals are not going to disappear - they will just reappear in
either emergency rooms or jails.

Senator Leeper asked if prescriptions written for the Medicaid
population mirror the general population. Ms. Kustra said the average per
person prescription is 12, and the number is higher for the Medicaid
population. She said it is not surprising that the per prescription for the
Medicaid population is higher because of the elderly population which can
average as many as 18 or 19 prescriptions per patient.

Senator Leeper said the prescription drug commercials being
shown on TV are absurd and only a recent phenomena. He asked if there are any
indications that the advertising will be stopped. Ms. Kustra said she thinks
the advertising is here to stay. Physicians like it because it brings more
people to their offices and the drug companies like it because it has boosted
sales. She added that TV stations also benefit from the advertising. Senator
Leeper said it is very discouraging because health care costs will only
continue to rise.

Next, the committee heard from Secretary Carol Palmore on
the number of state employee positions. Secretary Palmore said the total number
of state employees in the Executive Branch in December 1991 was 41,972. When
the Governor issued an Executive Order on December 4, 2002 to reduce the state
work force by 1,000 employees, there were 38,725 state employees. Prior to July
1998, there was a proliferation of employee categories such as full-time,
seasonal, and part-time working 100 hours in addition to full-time employees.
House Bill 727, enacted in the 1998 Regular Session, required agencies to
convert those seasonal and part-time employees into full-time positions
resulting in a rather large increase of full-time employees in January 1999 and
a corresponding decrease in the number of part-time and other employees.

Representative Moberly asked about the history of the cap on
state employees. Secretary Palmore said the mandate for a cap on state
employees was put into statute during the administration of Governor John Y.
Brown. In a later session, the enacted budget funded more than 33,000 full-time
employees. A lawsuit was filed and the Supreme Court ruled that when a statute
is in conflict with a provision in the budget bill, the budget will supersede
that statute for the time period during which it was in effect. Every budget
bill since that time has funded more full-time employees than the mandated
number of state employees.

Secretary Palmore said the increase in funded positions for
state government have been in the areas of criminal justice, the state parks
systems, veteran's nursing homes, and education related initiatives. Under
criminal justice, the increase in positions are in juvenile justice, prison bed
expansion, Commonwealth attorneys, probation and parole, and the public
defender program. As a result of legislation passed during the 1996 session,
Kentucky is now a model for the nation in its juvenile justice department and
program. The enabling legislation created the Department of Juvenile Justice in
the 1996 session and 696 new positions have been funded in each subsequent
budget and also in the Governor's 2003 spending plan. Expansion of prison beds
was initially funded in House Bill 2 in the 1994 session funding a total of 382
new positions. These increases have been funded in each subsequent budget and
in the Governor's spending plan. In 1996, there was testimony from Commonwealth
Attorneys about the difficulty part-time attorneys have funding and staffing
their offices. Many were having to pay for office and equipment to operate
their offices. As a result, 33 Commonwealth attorneys were made full-time
attorneys under the unified prosecutorial system and some of their support
staff, such as victim advocates were also added to the state personnel
complement. House Bill 455 from the 1998 General Assembly provided funding for
169 new positions for probation and parole officers and to oversee new
responsibilities in mental health treatment. The Public Defender Program was
greatly enhanced in the 2000 session. In addition to the number of employees,
there was a substantial salary increase for Assistant Public Defenders. Funding
was included in the 2000 budget bill and carried forward into the Governor's
2003 spending plan. House Bill 455 also funded additional criminal justice
training positions. In the state parks system, new recreational facilities were
built, or improved at seven state parks. In addition, five golf courses
required additional maintenance staff. The 2000 budget allowed construction of
two new veteran's nursing homes in Hazard and in Hopkins County. The number of
new employee positions funded was 320. Staff at the Kentucky Higher Education
Assistance Authority was increased; the Kentucky Professional Standards Board
was elevated and enhanced; and the Kentucky Virtual University was created in
Post-Secondary Education Reform. The funding for these initiatives was included
in the 1998 and 2000 budgets and carried forward in the Governor's 2003
spending plan. The number of new positions budgeted was 148.

There have been 2,541 new employee positions added over the
past seven or so years through enabling legislation, or budget provisions that
have continued to be funded in each budget. The only major loss of positions is
the transfer of technical post-secondary education to the Kentucky Community
and Technical College System. The number of employees who were transferred as a
result of that reform was 2,577. Secretary Palmore said the actual reduction
during the Patton administration from December 11, 1995 to the number of
employees on December 3, 2002 is 1,133. She said the Governor is committed to
reduce the number of employees by 1,000 by December 2003.

Other cost saving measures that were actually put into place
in the summer of 2001, before the Governor's Executive Order have resulted in
an estimated $25 million in savings. Constraints have been put in place on
overtime and compensatory time. The Governor has also issued a moratorium on
the execution of new and amended personal service contracts for the balance of
the 2003 fiscal year. A contract requires special permission from the Secretary
of Finance and Administration. Other cost saving measures are a reduction of
500 vehicles in the state motor pool, a reduction in utility costs, and
restrictions on leases of state properties. The Governor has ordered a
reduction in travel expenses and a 25 percent additional reduction on
out-of-state travel, which was already reduced in FY 2002 by about $2.5
million. There is a moratorium on equipment and furniture purchases and all
surplus property will be evaluated for possible disposal. Because the Governor
does not have authority over Constitutional officers and management employees
of the Commonwealth's elementary, secondary, and post-secondary educational
systems, he has requested them to carefully review the provisions of the
Executive Order and attempt to implement similar cost cutting measures.

Representative Moberly asked for an estimate of merit versus
non merit employees. Secretary Palmore said there were 34,405 merit employees
and 4,320 non merit employees as of December 3, 2002. The non merit employees
include direct gubernatorial appointees and approvals for cabinet secretaries,
commissioners, division directors, and executive secretaries. There were 369
executive secretaries.

Representative Moberly asked how many employees are in the
principal assistant category and if that category is non merit. Secretary
Palmore said as of December 3, 2002, there were 171 principal assistants and
they are non merit positions.

Representative Moberly asked if there is a history of when
the state started having the category of principle assistant and if that
category has grown, or held steady since its implementation. Secretary Palmore
said she believes the principal assistant category was created during the
Carroll administration. She said her agency is running numbers on how many
positions have been held.

Representative Barrows asked for the number of employees in
the principal assistant category who may have reversion rights because they
went from a merit position to a non merit position. Secretary Palmore said she
would provide that information.

Representative Moberly asked how many state employees have
retired and been rehired full-time by the state. Secretary Palmore said as of
January 27, there were 197 returned retirees. She said the Executive Branch
developed administrative regulations that greatly restricted the hiring of
retirees. Included in those regulations, anyone who is receiving a retirement
benefit and comes back to work for the Executive Branch must be treated as a
brand new employee.

Representative Moberly asked if the rehired state employees
fit into high salary bracket or lower salary bracket. Secretary Palmore said
she would provide that information.

Representative Moberly said some employees are under the
state's supervision, but they have been hired on a personal service contract
and are not being treated like regular state employees. Secretary Palmore said
the Personnel Cabinet does not deal with personal service contracts. She said
the Finance and Administration Cabinet could provide information about personal
service contracts.

Senator Kelly said it is interesting that the overall number
of state employees has been reduced from 42,000 employees in 1991, to about
39,000 employees currently, but the growth in personal service contracts has
gone from $175 million to $350 million over the same period of time.

Representative Lee asked for the number of retired employees
who come back to the state and work on a hourly rate.

Chairman Moberly asked why the state could not receive
immediate monetary relief if an additional 1,000 employees are eliminated.
Secretary Palmore said statutes passed in the early 1980s to lay-off state
employees requires about 23 steps and takes about four and one-half to six
months to complete before effecting any savings. In addition, the state would
have to pay to unemployment dollar-for-dollar the amount of unemployment that
is then paid to those persons who are laid off. Another problem is if an
employee takes it to court, lay-off cases are very difficult to win and the
court cases would be multiplied. She said some states are using a furlough
program to avoid lay-offs and the legal problems.

Senator McGaha asked how much the state saved by
transferring the KCTCS employees. Mr. Hintze said there were no savings.

Chairman Moberly asked if non merit employees will be
affected by a lay-off. Secretary Palmore said they would not be affected
because they are employees "at will."

With no further business, the meeting adjourned at 12:55
p.m.

All meeting materials and a tape of the full meeting is
available for review in the Legislative Research Commission library.